FCA responds to independent reviews into its regulation of London Capital & Finance and Connaught

The FCA has today responded to the independent reviews of its regulation of London Capital & Finance plc (LCF) and Connaught Income Fund Series 1 and connected companies (Connaught).

The reviews, undertaken by Dame Elizabeth Gloster and Raj Parker respectively, are now available – The LCF Review and The Connaught Review.

The FCA has accepted the nine recommendations addressed solely to the FCA in the LCF Review and the five lessons identified by the Connaught Review.

See our full responses to both reports – FCA response to the LCF Review and FCA response to the Connaught Review.

The LCF Review

The LCF Review has assessed the FCA’s actions, policies and approach when regulating LCF between April 2014 and January 2019.

LCF issued non-transferable securities, known as mini-bonds, to 11,625 investors, with a value of over £237 million.

In December 2018, the FCA ordered LCF to withdraw its promotional material. On 30 January 2019, LCF entered administration. The Financial Services Compensation Scheme has paid out just over £50.9 million in compensation to LCF customers and is continuing to assess outstanding claims. The recovery of assets by the administrators continues. The FCA is investigating whether LCF’s collapse was caused by serious misconduct by individuals and third parties related to the firm. Criminal investigations and regulatory investigations by the Serious Fraud Office and the FCA into fraud are continuing.

The Connaught Review

The Connaught Review has assessed the Financial Services Authority’s and the FCA’s approach and response to intelligence, and the FCA’s approach to and involvement in the mediated negotiations before the launch of enforcement investigations in March 2015. Connaught – a fund operated by Capita Financial Managers Limited (CFM) between April 2008 and September 2009, and Blue Gate Capital Limited between September 2009 and December 2012 – was an unregulated collective investment scheme which provided short-term bridging finance to commercial operators in the UK property market.

On 3 December 2012, Connaught entered liquidation. At that point, the outstanding principal invested by investors was £79 million. Since then, investors have received more than £80 million, including £58 million in redress under the settlement the FCA secured from CFM.

The FCA response

Charles Randell, Chair of the FCA, said:

'There are a number of things we could have done better in our supervision of these two firms and both reports highlight the need for the FCA to continue to change to better protect consumers from harm.

'We accept all the recommendations that have been made to the FCA and we are profoundly sorry for the mistakes we have made.

'The collapse of LCF has had a devastating effect on many investors and we will do everything we can to conclude our investigations as quickly as possible and support the recovery of further funds for investors.

'The FCA has always prioritised supervising regulated activities which affect the most vulnerable in our society, who often have very limited financial choices. We also introduced measures designed to prevent harm for those consumers who had more ability to choose. These reports not only highlight operational mistakes; they also indicate that the measures we introduced may not have been as effective as we wanted and challenge the balance that we struck at that time.

'Over the last few years we have already made significant changes in our approach to supervising firms. We have learned considerable lessons from what happened with LCF and Connaught and we will provide public updates as we implement the recommendations.

'Consumers must have trust in the FCA to do its job properly. We need to reinforce a culture in which people at the FCA are empowered and confident to take responsibility for bold interventions. The organisation has made progress in developing this culture in the last several years, and I’m proud of what we have achieved during the current coronavirus crisis. We know we have more to do.

'The FCA Board and I have every confidence that continuing the transformation of our organisation is the right way to bolster trust in the FCA and realise our ambitions for change.'

Nikhil Rathi, Chief Executive of the FCA, said:

'Having joined the FCA as Chief Executive in October, these reports into historic events make sobering reading.

'My colleagues and I are committed to implementing the recommendations and lessons learned which will require significant and necessary changes to the way we regulate, our use of data and intelligence, and our culture.

'We know that the FCA must make faster and more effective decisions, prioritise the right outcomes for consumers, markets and firms, and reform our approach to intelligence and information sharing. Our continuing action plan, specifically on our wider transformation programme and high-risk consumer investments, seeks to do this.

'The FCA is always going to have to make difficult risk-based choices about where to allocate resources and to strike a balance between regulatory action and consumer choice and responsibility. I hope that the mistakes the FCA made in these cases do not detract from the work and dedication of my colleagues over several years.

'We have demonstrated that when we act boldly, we deliver for consumers, markets and firms. With the continued dedication of all at the FCA and with the support and oversight of the FCA Board, I know that we can make the changes we need in the coming months and years to respond to these reports and deliver for UK consumers and markets.'

Next steps

Today, Nikhil Rathi outlined key actions the FCA will take in the next six months:

  • restructuring the FCA to join up its policy, supervision and competition functions under two new Executive Directors so we have a better approach to translating insights into risks and warnings before taking action to tackle them;
  • becoming a more data-enabled regulator through the recruitment of a Chief Data, Information and Intelligence Officer and the establishment of a separate programme of change that transforms the way we handle and prioritise information and intelligence;
  • undertake a “use it or lose it” exercise, with firms that have not used their regulatory permissions to earn any regulated income for the last 12 months at risk of having their Authorisation revoked, to reduce the risk of firms having a permission to carry out regulated activity purely to add credibility to their unregulated activities;
  • take forward new measures to tackle pension scams with DWP, once the Pension Schemes Bill has received Royal Assent; 
  • enhance training for all frontline Supervisory, Authorisation and Enforcement staff, who will have completed mandatory training on ‘FCA Powers and Unregulated Activities’, ‘Financial Accounting’ and ‘Business Model Analysis’ by the end of the first quarter next year. We will also add to our existing training on supervisory tools to give staff greater confidence in knowing when and how to intervene using relevant intelligence held across the FCA;
  • recruit additional prudential specialists to act as quality assurance and assess firms with complex business models, including where they combine regulated and unregulated activity, within our Authorisation Division;
  • work with the Government to tackle scams advertised and promoted on Google and other online platforms; and
  • disrupt scams and warn consumers of the risks by stepping up our own consumer campaigns, including ScamSmart and targeted digital activity.

We have already made permanent the temporary restrictions we imposed on the marketing of speculative illiquid securities, such as those issued by LCF.

We have invited Dame Elizabeth Gloster and Mr. Raj Parker, the Independent Reviewers, to meet with our senior leadership so we can hear frankly from them about their recommendations and listen carefully to their feedback on the FCA.


We know that this is an uncertain time for bondholders. We will determine complaints against the FCA arising from LCF as quickly as we are able to. In line with our published Complaints Scheme we will consider all complaints on an individual basis.

Governance and oversight

The FCA Board and its Audit and Risk Committees will oversee the implementation of the recommendations of both reports. The Chairs of the Board and these two Committees will issue a report within our Annual Report, explaining how they have performed this oversight role.

ExCo remuneration

The FCA Board has decided that discretionary pay awards for Executive Committee members which have been deferred in respect of the 2019/20 year will not be paid.

Recommendations and lessons learned

LCF Report recommendations

All nine recommendations for the FCA in the LCF Report have been accepted:

  1. The FCA should direct staff responsible for authorising and supervising firms, in appropriate circumstances, to consider a firm’s business holistically. 
  2. The FCA should ensure that its Contact Centre policies clearly state that call-handlers: (i) should refer allegations of fraud or serious irregularity to the Supervision Division, even when the allegations concern the non-regulated activities of an authorised firm; (ii) should not reassure consumers about the nonregulated activities of a firm based on its regulated status; and (iii) should not inform consumers (incorrectly) that all investments in FCA-regulated firms benefit from FSCS protection. 
  3. The FCA should provide appropriate training to relevant teams in the Authorisation and Supervision Divisions on how: (i) to analyse a firm’s financial information to recognise circumstances suggesting fraud or other serious irregularity; and (ii) when to escalate cases to specialist teams within the FCA. 
  4. The senior management of the FCA should ensure that product and business model risks, which are identified in its policy statements and reviews as being current or emerging, and of sufficient seriousness to require ongoing monitoring, are communicated to and appropriately taken into account by staff involved in the day-to-day supervision and authorisation of firms. 
  5. The FCA should have appropriate policies in place which clearly state what steps should be taken or considered following repeat breaches by firms of the financial promotion rules. 
  6. The FCA should ensure that its training and culture reflect the importance of the FCA’s role in combatting fraud by authorised firms. 
  7. The FCA should take steps to ensure that, to the fullest extent possible: (i) all information and data relevant to the supervision of a firm is available in a single electronic system such that any red flags or other key risk indicators can be easily accessed and cross-referenced; and (ii) that system uses automated methods (e.g. artificial intelligence/machine learning) to generate alerts for staff within the Supervision Division when there are red flags or other key risk indicators. 
  8. The FCA should take urgent steps to ensure that all key aspects of the DES Programme that relate to the supervision of flexible firms are now fully embedded and operating effectively. 
  9. The FCA should consider whether it can improve its use of regulated firms as a source of market intelligence.

Connaught Report lessons learned

The FCA has accepted all five lessons learned, identified in the Connaught Report:

  1. Issues were caused by a lack of clarity about the role of operators and other market participants and the nature and extent of the regulatory perimeter 
  2. The Regulator should continue to improve information sharing between departments and its related IT systems and processes 
  3. The importance of effective coordination and oversight across different teams 
  4. Continue to invest in and update systems regarding whistleblowers 
  5. The culture of the Regulator

Notes to editors

Dame Elizabeth Gloster’s investigation into LCF was initiated on the instruction of HM Treasury in May 2019, at the request of the FCA Board. Mr. Parker’s investigation into Connaught was recommended by the Financial Regulators’ Complaints Commissioner and then commissioned by the FCA Board in June 2019.